Aurora Magazine

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Published in Nov-Dec 2012

Reinventing the automobile industry

Published in Nov-Dec 2012
The import of second-hand cars has exposed major fault lines in Pakistan’s automobile industry.

After years of customer complaints about local car assemblers and insinuations of rigged pricing, profiteering, cartelisation and absence of choice, the Government of Pakistan (GoP) decided to ‘open’ the market and allow the import of refurbished, second-hand cars.

As a result, traders lined up for the immense business opportunity that would come with customer delight at the sudden availability of cars with superior technology at much cheaper prices; all this much to the ire of local assemblers, who suddenly found that the tables had been turned on them.

Government policies had otherwise been friendly towards local assemblers. The abolition of the special 2.5% excise duty and the reduction in the sales tax from 17 to 16%, did provide major buoyancy to the industry by reducing the cost of vehicles. Other measures, such as the revival of the yellow cab scheme in Punjab, offered even more stimulants. Customers, however, were far from happy, and the feeling was that the benefits of these measures were not trickling down to them.

Many analysts agree that the local automobile industry had been asking for trouble for years of perceived customer insensitivity and lack of innovation. The opening of the market to second-hand imports was seen as a sort of ‘revenge’ for the many years when car buyers were not only faced with limited choice, they also had to cough up extra money to overcome the long list of pre-booked vehicles.

Yet many analysts question the prudence of a decision seen by many as a recipe for disaster for the local industry. The industry contributes nearly Rs 50 billion to the national exchequer (a significant three percent of the GDP), provides employment to over 3.5 million people and sustains a peripheral vendor industry that survives because of the local deletion policy which makes it mandatory for car assemblers to progressively manufacture parts locally. On top of this, Pakistan pins its hopes on the automobile industry providing at least one sustainable manufacturing base.

Yet the GoP opened up the market for imported second-hand cars, initially for cars up to three years old and then up to five years the next year. As a result, imports spiked by nearly 250% – from 16,000 cars imported in 2010-11, to over 55,000 cars in 2011-12. The projections for the current fiscal year are even higher.

Most of the imported cars come with no customer support or warranty for service and spares. Yet their presence deters local expansion plans, thus impacting local employment, industrialisation and transfer of technology, while also restricting government income from direct taxes.

Orders for spare parts have declined, and hundreds of locally assembled cars stand parked at showrooms. July 2012 saw the lowest ever spare parts production, as car sales had declined by nearly 30%. As a result, medium to small parts manufacturing units suffered losses worth an estimated Rs 20 billion. Many are out of business and thousands of jobs are at stake.

Local assemblers are not the only ones suffering. Analysts estimate that the GoP has foregone Rs 16.5 billion in levies and taxes by importing 55,000 vehicles at the expense of local production and, in the bargain, spent $371 million on the actual import. All this when the rupee continues to be under stress, economic growth is stagnant and international market volatility is cutting into projections. Adding to the pressure is the fact that under the present circumstances, local assemblers are likely to further entrench themselves in their reluctance to invest in expansion thus inhibiting the availability of better models. The uncomfortable question is whether we are heading towards deindustrialisation and moving from being a ‘manufacturing’ state to a ‘trading’ state and that too at the expense of hitherto invested billions. Is this worth it?

There is another side to the argument. Take the example of India, where the automobile industry was also protected for years – but with positive results. Directed by a clear roadmap, India has progressed to the extent that industry stalwarts began innovating at home and buying global brands, such as Jaguar. Yet, what have 60 years of protection contributed to Pakistan’s automobile industry? The industry in still in relative adolescence, with not a single domestically designed and produced car in half a century – and is still calling for protection.

Perhaps, the time has come for all stakeholders to move away from small fixes and switch and focus on creating a time framed overhaul of the way Pakistan’s automobile industry operates.

Mazhar M. Chinoy has led the marketing services function for a leading multinational automobile company and is currently a Director at LUMS.